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Angels scarce, but still hovering - Entrepreneurs form alliances to smooth investor connections

In the scorched world of angel investing, Bill Maulsby is an aberration.

Founder of the Chicago-based BusBank charter bus service, Maulsby managed a significant feat this summer: He separated a group of angel investors from their dwindling supplies of cash.

By Rob Kaiser
Chicago Tribune staff reporter

Angels are generally known for having a supremely high tolerance for risk, but the dot-com collapse, telecom bust and general economic malaise has left them, along with the rest of the investing population, leery of placing new bets.

"It's as bad as I've ever seen it," said Wally Cornett, a 36-year veteran of the Chicago-area angel community. "I'm not sure you could raise money right now from angel investors for a 15-cent cure for cancer."

Still, hyperbole aside, there are some signs of life among angel investors.

A trickling of deals, like the one for BusBank, are getting done. More significantly, new groups of angel investors are forming as quickly as others folded after the Internet bubble deflated.

"There are more and more groups getting started in the last few years, even since the bubble," said Marianne Hudson, manager of strategic alliances at the Kansas City, Mo.-based Ewing Marion Kauffman Foundation, which has held conferences for angel groups.

Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, estimates that angels invested $30 billion in upstart companies last year, down significantly from the $40 billion to $45 billion they put in a year earlier, but level with late-1990s levels.

While angel groups get most of the attention, Sohl said, individual angels make the majority of investments.

The problem for entrepreneurs is connecting with these investors.

In normal times, Cornett said, an entrepreneur will talk with 20 serious angel investors, 10 will express some interest and one will ultimately write a check. To get one investor today, a business owner will need to start off with a pool of 50 angels, which burns a considerable amount of time, Cornett said.

Groups of early stage investors, like Chicago-based Prairie Angels, were formed to help ease this process, bringing together promising entrepreneurs and well-heeled investors.

These groups take on many different structures. Some collect pools of money to invest in start-ups, while others just serve as a showcase for young companies and the angels make investment decisions individually. A paid manager runs some groups, while others divvy up responsibilities among the angels. Most only invest in a handful of deals, or less, annually.

Prairie Angels was formed two years ago and has 60 members. The group looks at three different business plans at dinners every other month. If more than six angels express an interest, the group further investigates the opportunity.

Barry Moltz, co-founder of Prairie Angels, said in some ways, angel investing is easier today. During the Internet boom, venture capitalists began making investments in earlier stage companies, treading on the angels' turf. New ventures being started today are coming from serious entrepreneurs, not the "tourists" that emerged amid the dot-com hype, Moltz said.

Still, many start-ups are asking for too much money without giving up substantial stakes in their companies, said Gordon Reichard, president of Northern Illinois Angels, which was formed in April.

"A lot of these entrepreneurs are still reading the books of the bubble," Reichard said. "Their valuations are still out of line."

Several angel investors said that while start-ups with experienced executives and entrepreneurs are always a plus, they're crucial in today's battered economy.

Experience has value

The angels who invested in BusBank found that experience in Maulsby, a veteran of the consumer products, travel and media industries.

"I have legitimate gray hairs," said the 50-year-old Maulsby. "This is not some dot-com."

BusBank, which doesn't own any vehicles, serves as a marketer for the owners of more than 60,000 motor coaches, school buses, trolleys and other buses, similar to how Orbitz and Travelocity operate in the travel arena. The company, which has 22 full-time employees and 10 part-time workers, expects to have revenue of nearly $4 million this year.

Maulsby, who raised nearly $200,000 from three angel investors this summer, said he has purposely grown the company slowly.

"I didn't want to paint a big picture that we couldn't deliver on," he said.

Not on every radar screen

Still, realism and experience alone will not guarantee angel investments, particularly in the Midwest.

Unlike Boston; Austin, Texas; North Carolina's Research Triangle; and California's Silicon Valley, "Chicago is not an area that jumps out as a robust angel territory," said Sohl, of the Center for Venture Research. "It's not one of the meccas that is usually on our radar screen."

But new angel groups are forming.

The Women's Business Development Center-Chicago is helping start the Ceres Venture Fund, which will aim to help women-owned start-ups.

More than 15 female entrepreneurs and executives are pulling together the fund, which expects to start making investments of around $250,000 in the spring, said Linda Darragh, vice president at the women's development center.

The fundraising activity at Northern Illinois Angels also shows there is interest in early stage investments. Since the spring, 20 potential investors have put up $5,000 apiece to join the group, which expects to present its first deals next month.

"A lot of them still want to invest," Reichard said. "They have a lot of money and they hate it sitting in a bank account or mutual fund."

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